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What is an NBFC?

An NBFC (Non-Banking Financial company) provides similar services as a Traditional Bank except issuing on Demand drafts and cheques. NBFC mainly provides financial services to individuals and Businesses. The principal objectives of Non Banking Financial Company to provide loans and advances, working capital loans, Personal loans, Investment in shares, debentures and other stocks issued by Government or other local authorities, insurance business, leasing, hire-purchase or offering Market Place Lending (P2P) Platform.

In general, NBFC is meeting the gap in financial needs for the organized and unorganized individuals and business. In the recent times, banks are focusing on Mid-Size loan to SME/MSME and Large Corporate as well to selected individuals with excellent credit scores where in case of Loan from the bank is against collateral or income. This gap creates an opportunity for NBFC to enlarge its presence in the financial market.

NBFC Provides quick loan services in comparison to the bank, this is the reason NBFC is growing faster than traditional Bank and RBI is also encouraging the NBFC to come into the financial sector and work for financial inclusion. Developing Countries like India, where less than 1 in 10 people have a documented credit history. Indian Fintech Start-ups have been using alternative credit scoring model to approve or reject the loan application. NBFC registration and further Operations of financial services are regulated by the Companies act 2013 and RBI Act 1934. The Reserve bank of India is the supreme regulator of NBFC in India. Credit growth of NBFCs is recorded at 24.3% per year as against 21.4% for banks.

What is the NBFC Registration?

If you are planning to start a finance business, the 1st Step is to incorporate a Private Limited Company or Public limited company under Companies act 2013. After Company formation, and Bank Account opening, there is a need to create a fixed deposit of Rs. 20 Million and approach NBFC-COR Division of the RBI. Application for COR must be filled in the prescribed manner.

The Designed officer of RBI will conduct proper due diligence and proper examination of the founder's backgrounds, verification of shareholder's profile and source of fund. If everything is clean and as per the satisfaction of RBI COR Committee, then within a time frame of 90 to 120 days, RBI may issue Certificate of registration or NBFC License. Non-banking financial company shall not commence or carry on the business of Non- Banking Financial Institution without obtaining a Certificate of Registration or NBFC License issued by the Reserve Bank of India.

What are the Types of NBFC in India?

By nature of the activity, they undertake, NBFC License can be categorized into the following:

Asset Finance Company.

Investment Company.

Loan Company (Most Popular).

Peer to Peer Lending Marketplace.

Infrastructure Finance Company.

Core Investment Company.

Micro Finance Company.

Mortgage Guarantee Company.

Housing Finance Company.

Core Investment Company

What are the Categories of NBFC in India?

By Deposit following Classification

Deposit accepting NBFCs (Type -1)

Non-Deposit accepting NBFCs (Type -2)

Note – Currently is not issuing NBFC license/ COR for Deposit-taking NBFC.

What is Deposits Taking NBFC?

Deposit-taking NBFC is a type-1 NBFC, is eligible for accepting Public deposits 1.10 time of its Net worth subject to prior approval from the Reserve bank of India. 2 years ago the Deposit-taking NBFC Registration was very popular. RBI has experienced that small companies who obtained the NBFC License for accepting Public Deposit have defaulted in the repayment of deposits. In the past 2 years, RBI strictly views and industry have experienced close watch over the operations of the NBFC-D.

In Public interest, and preventing deposit-taking NBFCs to not misuse the NBFC License issued by RBI, there have been certain Strict limitations imposed and conditions specified, for accepting deposits by the NBFCs. In our Opinion, RBI may not grant new NBFC License or Substantial Change in shareholding in the Existing NBFC-D.

What is the NBFC Registration Procedure?

RBI has simplified the NBFC Registration Process after 2016, in the recent few months RBI has issued more than 100+ new NBFC License to the entrepreneurs.

RBI is a completely autonomous body, the DNBR has transparent assessment process. Hence, during the NBFC registration process, if they noticed need of any additional documents they will email you or send you a formal notice, within 30 days, you must respond to their query.

If you are genuine enough then you can expect NBFC license in 90 to 120 days. Before the filing of Application for COR (Certificate of registration), You can follow the following indicative checklist. For further details, you are requested to carefully read the RBI Circular.

Select a Consultant with Minimum 10 years of Experience in NBFC & Banking laws

Scrutinize the Consultant past experience, the Firm must have a team size of 50 to 100 with Combination of professionals like CA, CS, Lawyer, and Senior Banker.

Ask NBFC Consultant to give you the minimum 3 references of clients who have obtained NBFC License in previous 2 Months.

Ask NBFC Consultants to register a Private Limited company or Public Limited Company

Open a Current account with a Scheduled commercial bank

Ask NBFC Consultants to Create a high-Level Business plan for the NBFC (Financial projections for sixty Months). The NBFC business Plan must contain a comprehensive analysis of the loan product, Lending process, Market research, SWOT analysis, Founders Profile, Credit Risk and Assessment model.

Create Fixed Deposit of Rs. 2 Cr / 20 Million and such Fixed Deposit shall be held in your bank A/c for the assessment Period or until you clear the eligibility process of NBFC License. The timeline for NBFC Registration may be in the range of 90 to 120 days. As soon NBFC License is granted by the RBI, you can break the Fixed deposit held in your bank Account. Over the Life of NBFC, the Minimum net owned fund Rs 2 Cr. must be maintained.

NBFC Consultant will scrutinize all documents before physical submission of documents to RBI. Even a single mistakes or false submission of facts/ Documents in Application may lead to rejection of your application for COR.

Physical Submission of COR application to RBI’s NBFC COR Department along with all supporting documents

The Designated officer from Department of Non-Banking Regulation shall correspond you via email or Written Notice for additional submission of documents

You need to respond/ Reply to RBI Notices from the time to time

The NBFC license may be granted by the Department of Non-Banking regulation only after vigilant inspection of the application, Shareholders, Founders, and documents attached to it.

What is Enterslice's SOP for NBFC Registration Advisory Services?

Enterslice is leader and Rank-1 in NBFC/IRDA/SEBI advisory services. We offer financial services advisory services in more than 22+ Countries.

What is the NBFC Registration/NBFC License Requirement?

Before the filing of Application for COR with RBI, you need to understand what are the documents required for NBFC registration or NBFC license.

Register a Private Limited Company/ Public Limited company

The Middle name of Company Must be Finance, Finserv, final, Investment, Capital Fintech, Leasing e.t.c

The object clause in the MOA clearly depicting the financial/Investment business.

Obtain a Certified copy of Certificate of Incorporation, MOA & AOA from the Regional registrar of companies

KYC & Income proof of Directors and shareholders

CA Certified Net worth certificate of Directors, Shareholders, and Company

Obtain a Banker report about the no Lien remark on the Initial Fixed deposit of Rs 2 Cr / Rs 20 Million.

Appointment of an experienced chartered accountant in practice as Auditor of the applicant company

Submit highest educational/professional qualification of the directors of the Applicant company

Credit report of Directors and shareholders

Submit at least one Director's profile with 10+ years of Senior management experience in the Financial Services Sector Like NBFC / Bank. The technical director may be a Non-Executive Director or Executive Director.

Submit a clean Bankers report of the applicant company, Directors, Shareholders depicting details of deposits and loans balances as on the date of application

Verify Credit rating report of Directors and Shareholders, they should not have any default in repayment of the loan or financial facilities over the life. In case delay in repayment of a loan, with proper clarification RBI May accept the application for COR.

Source of the fund for initial capital Rs. 20 Million / Rs. 2 Cr Must not be a borrowed capital

The Applicant company should have a high-level business plan to prove the need for NBFC License

Organizations structure and decision-making process for approval/Rejection of a loan application

Submit Information technology policy in case you lend via the use of FinTech based lending model

Submit a declaration about No default or conviction under NI/CPC/CrPC /FEMA/PMLA

Submit a true copy of Audited Balance sheet and Profit & Loss account along with directors & auditors report of at least 3 years of Holding company (Required in case applicant is the subsidiary of a Private Limited company or Public Limited company or foreign company)

In case of FDI, Necessary FDI Compliance as per FEMA Act must have complied

Disclaimer – Above the list of documents have been discussed based on our experience may or not as per RBI Circular.

How Are NBFCs different from Banks?

NBFCs provide financial services similar to banks but they are more concentrated on an unorganized sector of the society having low or no credit rating score.

The other differences are:

NBFCs are barred to accept demand deposits, however, they can accept public deposits after getting NBFC Deposit-taking license from the RBI. Currently, Deposit-taking NBFC License is not possible in our view.

NBFCs are not entitled to issue cheque drawn on itself as they do not form part of payment and settlement system.

Credit guarantee and insurance facility are not available to depositors in case of NBFC.

Why do I go for fresh NBFC Registration Instead NBFC Takeover?

Applying for fresh NBFC License Application is always a better option, after 2016 RBI has simplified the process of NBFC Registration and especially for foreigner companies who intend to enter into the Indian Financial service market, We always advise them to apply for fresh NBFC License Application instead acquiring the existing one.

Advantages of fresh NBFC Registration

Low Legal Risk - If you are applying for fresh NBFC License Application, no need to worry about the Past Non-Compliances. In case of NBFC Takeover, Any Past Non-compliance with RBI Act may lead to cancellation of NBFC License.

Timeline - Fresh NBFC Registration can be completed in a period of 90 to 120 days with 90 % to 95% Success ratio at overall in our experience. At the other side, NBFC Takeover takes 5 months to 12 months time. In case you are a foreigner after Nod from Department of Non-Banking supervision again you need to apply for permission before the Foreign Exchange department of RBI, which again may take minimum 3 months’ time. At overall acquiring an NBFC by foreigner takes 12-15 months’ time and acquisition by Indian Shareholders may take about to 5 to 9 Months. In our experience, only 30% Takeover Deal was successful in past 5 years.

Title Risk – There is no title risk of Ownership after New NBFC Registration as you are the 1st shareholder of the company at another side in acquiring an existing NBFC, you will not able to establish the clear title of shares. As in 80% NBFC takeover case, we have experienced that target company has no documentary evidence about the transfer of ownership. Merely equity shares were transferred to ROC Records. The Share transfer deed has not been executed.

Tax Liability – There are no assets held by newly incorporated company hence there is no short term or long term gain but at another side, if you are acquiring existing NBFC, you need to prepare for future Capital gain liability, Penalty from Registrar of companies etc.

Capital – In the case of fresh NBFC License application, you may need to block your Rs. 2 Cr / Rs. 20 Million FD in Bank Account and definitely you will earn some amount of interest in it. At another side, in a case of the takeover, the proposed shareholders are required to submit the Bankers report stating the Bank Balance equivalent to book value of the shares.

What are the NBFC Registration Fees?

For registering a Private Limited company with Capital Rs. 2 Cr, you will require to pay a government fees Approximate Rs. 3,50,000 ($ 5000 to $ 6000 ).

Need to hire highly experienced consultants that may cost you on average Rs. 7 to 8 lac, the advisory firm should be eligible to help you in building the business, merely NBFC license is not sufficient. You need an advisory who can help you raising fund.

What are the NBFC compliances after COR?

After you successfully complete the NBFC Registration Process and from here need to follow the RBI Guidelines, Circular, and notices published in the public domain from time to time.

Need to obtain membership from all four Credit rating agencies (CIBIL, Equifax, Experian and CRIF Highmark), if you are willing to have credit scoring from API, Please use Equifax.

Apply for E-KYC Registration & Regular reporting of the borrowers.

FIU Registration.

Secretarial compliances.

Statutory Audit.

Tax Audit.

Income tax Returns.

ROC Returns.

Filling of NBS-9 by use of Online Platform of RBI (COSMOS).

What are the supports or Services will I get from Enterslice after Certificate of registration from RBI?

Advisory for Fintech Based Credit Assessment model

Assistance in SOP of the Organization

Assistance in designing your loan product

Helping founders in preparing to Go to market strategy

Assistance in drafting / Reviving agreements/Contracts as required to operate the NBFC.

Finalizing reporting formats from various verticals of the organization

Guidance on Digital Marketing and support in achieving lower customer acquisition cost

Who are the Regulatory for Fintech In India?

IRDA is the regulator for Insurance web aggregator and other insurance-related Business

SEBI is the regulator for Robotic investment advisory

Why is NBFC Good Choice for Fintech Startups?

Traditional banks are operating as a classic business model like – Brick and Mortar branch’ this cost a lot in the opening and running a branch. At another side NBFC with Fintech Business model, they operate from one office and focusing on the digital presence and entire customer acquisition is either online or Application sourcing from DSA (Direct selling agent). You can apply for NBFC License with a Net owned fund Rs. 2 Cr / Rs. 20 Million.

NBFC in India are primarily focused on meeting the financial needs of the underserved section while Banks target upon the organized sector like big business houses and salaried individuals.

The Bank has slow loan processing as compare to NBFC. Non Banking Financial Company has quick loan sanctioning process. If a person applies for Loan from NBFC the paperwork is less as compared to a bank. Because NBFC deploys alternative data points to assess the loan eligibility of the applicant. Hence, credit decisions are very fast in NBFC.

How Fintech Enablement by the RBI?

UPI: the “Unified Payment Interface”, commonly known as UPI, holds the potential to bring the much-needed revolution in the in the digital payment systems thereby leading towards a cashless economy

Payments;

Lending;

Security/Biometrics – Aadhar based payment system

Wealth Management

What is Peer to Peer Lending Marketplace?

Initially, RBI was against P2P Business model, As in China it has a very negative result. But in interest of Community RBI has issued a consultation paper in 2017 and after feedback from industry has been taken into the consideration. Finally, in Oct 2017 RBI has issued some detailed guidelines for peer to peer lending license in India.

P2P Lending Marketplace regulation came into the picture from Oct-17, P2P Will require to register as NBFC. The investor will in invest in escrow A/c, EMI/ Recovery everything will be routed throw Escrow A/c.

The Key Challenges in this model is to set a recurring payment recovery system from escrow A/c to Investor A/c, P2P NBFC A/c. This requires a high level of data capturing system and use of Machine learning will be required to prevent the fraud in the online transaction.

What is the Alternative Lending Model?

Large no of NBFC’s has adopted the ALM. This is the biggest attraction of the community towards NBFC, the borrower prefers to reach NBFC for their loan requirement instead of a bank.

Know Alternative Lending before You register an NBFC?

Unlimited Reach - Fintech NBFC have been targeting a customer demographic who were outside the scope of the traditional banking system.

Higher ROI - Fintech based NBFC has higher fund cost as Compare to Bank, however, enjoys a lower customer acquisition cost and Lower servicing cost than the bank.

Lower NPA than Bank - Fintech based NPA has higher NPA compare to banks. But ROI is much higher than a secured lending model. Alternative lending business has 2 times better profit than Traditional Lending.

Frequently Asked Questions on NBFC Registration

1. Is a registered NBFC is a financial Institution?

Yes. NBFCs are the companies registered under the Companies Act, 2013 and after company registration, You need to obtained Certificate of registration or NBFC License from the reserve bank of India.

2. What are the sources of funds for an NBFC?

Yes. NBFCs are the companies registered under the Companies Act, 2013 and after company registration, You need to obtained Certificate of registration or NBFC License from the reserve bank of India.

3. What is meant by principal business in the context of a registered NBFC?

If an NBFC has more than 50 percent of the total assets or revenue from financial services comprises more than 50 percent of the gross income. A company fulfilling both these conditions will be eligible to Apply for NBFC license to the RBI.

4. Can NBFCs accept deposits?

Only those NBFCs which have been granted a license depicting their eligibility to accept deposits from the public shall proceed for the same. However, such deposits are not demanded deposits.

5. What is the maximum limit to accept deposits from the public?

An unrated NBFC complying with all the prudential norms and maintaining capital adequacy ratio of at least 15% and having NOF of 25 Lakhs is allowed to accept or renew public deposits not exceeding 1.5 times of its NOF or up INR 10 crores, whichever is lower.

On the other hand, a rated NBFC complying with all the prudential requirements are allowed to accept deposits up to 4 times of their NOF.

6. Does every NBFC required to be registered with RBI?

The Reserve Bank of India (RBI) controls the working of all NBFCs under the framework of RBI Act, 1934 and directions issued by it from time to time. Therefore, every NBFC, to carry out its operations, is required to obtain NBFC license from the Reserve Bank of India to commence its business.

7. What are the basic requirements for the takeover of NBFC?

Prior approval of RBI is required to initiate any takeover of NBFC. An application is submitted on the letterhead of the company to the Regional office of the RBI for getting the approval. Once the approval is granted, a public notice in the leading newspaper shall be published. Thereafter, the Share-Purchase agreement is signed and takeover is affected. It shall further be kept in mind that only an NBFC can take over another NBFC.

8. What is the definition of Net Owned Funds (NOF) of NBFC?

The addition of paid-up equity share capital and free reserves as per the latest balance sheet of the company and deducting the following items from it:

Investment of such NBFCs in its subsidiaries, same group companies, and other NBFCs; the book value exceeding 10% of the amount calculated in (1) above, of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with its subsidiaries or companies within the same group

9. What shall be considered as Change in management in an NBFC?

For any change in the shareholding resulting in 26 per cent acquisition/ transfer of the paid-up equity capital, or any takeover or acquisition of control of NBFC, or change in the management as a consequence of more than 30 % change in the Board excluding independent directors, prior approval from the Reserve Bank shall be taken. The application shall be made to the RBI for the approval, on the letterhead of the company along with all the necessary documents. The approval usually takes 1-3 months of processing time. After getting approval from RBI, a public notice shall be given in one leading national and one leading local newspaper. Then, the Share Purchase Agreement is prepared and signed, the management is handed over and the consideration remaining, if any, is paid off within the stipulated time of 31 days from public notice or such other time period as mutually agreed upon by the acquirer and transferee.

10. Is FDI is allowed in Newly incorporated NBFC?

There is no limitation on FDI in NBFC, but FDI must be in the form of T1 Equity. If you bring FDI at the initial stage of registration, you need to comply with FEMA Provisions along with the RBI Act.

"
Enterslice use technology better than others. That saves time and money; Team enterslice is more efficient than traditional competitors, and that helps to pass on the cost advantage to its clients. The company is building a high-level transparency in legal services by optimum use of technology and process automation in consulting. I highly recommend this company. "

Nilanjan Bandyopadhyay

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Excellent advisory role by Enterslice Team. They are a trusted partners to us. Narendra and his team helped us with our pre NBFC applications and Post NBFC advisory services. "

Amit Goel

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Amazing services provided by your organization. They have completed our NBFC registration order within stipulated time period of 90 days. They provide constant guidance and support in the process. Their support in building fintech software is amazing. "